If the economy is at potential output and the Fed increases the money supply, in the SHORT run interest rates will likely:

Question

Quizplus · Accepted Answer

If the economy is already at its potential output, an increase in the money supply will lead to an excess supply of money in the short run. This excess supply will cause banks to lower their interest rates in order to lend out the excess funds. As a result, short-term interest rates will decrease in the short run.

If the Economy Is at Potential Output and the Fed